ECO 2302 PRIN MACO W/MYECO ACC >IP<
4th Edition
ISBN: 9781323504161
Author: CASE
Publisher: PEARSON C
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Chapter 11, Problem 5.5P
To determine
The reason for the
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Suppose that output is produced according to the production function Y =Kα[(1 - u)L]1-α, where K is capital, L is the labor force, and u is the natural rate of unemployment. The national saving rate is s, the labor force grows at rate n, and capital depreciates at rate d.
Express output per worker (y = Y/L) as a function of capital per worker (k = K/L) and the natural rate of unemployment (u).
Write an equation that describes the steady state of this economy. Find the steady state capital per worker and steady state output per worker.
Does this production function have constant returns to scale? Explain.
Select the answer that best describes Keynesian and Classical economic theories.
Classical theory is useful for describing the long-run movement between economic equilibria while Keynesian theory is helpful to describe short-run movements in the price level.
Classical theory suggests that the economy will quickly move between equilibria, eliminating the need for government intervention. Keynesian theory suggests that fiscal and/or monetary policy can be useful in counteracting changes in equilibria resulting from sticky prices and sticky wages.
Keynesian theory suggests that tax cuts or direct government expenditure are ways to stimulate the economy while Classical theory suggests that only tax cuts provide useful stimulus.
Classical and Keynesian theories both advocate for direct government intervention during recessions.
Using the “Keynesian” labor market and the aggregate production function, explain what happens to the amount of output firms are willing to produce …
If there is an increase in the price level.
If there is a decrease in the price level.
Chapter 11 Solutions
ECO 2302 PRIN MACO W/MYECO ACC >IP<
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- Suppose that output is produced according to the production function Y =Kα[(1 - u)L]1-α, where K is capital, L is the labor force, and u is the natural rate of unemployment. The national saving rate is s, the labor force grows at rate n, and capital depreciates at rate d. Express output per worker (y = Y/L) as a function of capital per worker (k = K/L) and the natural rate of unemployment (u). Write an equation that describes the steady-state of this economy. Find the steady-state capital per worker and steady-state output per worker. Does this production function have constant returns to scale? Explain.arrow_forwardSuppose that the government believes the economy is not producing goods and services at its optimal level. In an attempt to stimulate the economy, the government increases the quantity of money in the economy by printing more money. This monetary policy the economy's demand for goods and services, leading to product prices. In the short run, the change in prices induces firms to produce goods and services. This, in turn, leads to a level of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Higher inflation leads to unemployment.arrow_forwardIn the Keynesian framework, which of the following events might cause a reaction ? a) A large increase in the price of the homes people own b) Rapid growth in the economy of a major trading partner c) The development of a major new technology offers profitable opportunities for business d) The interest rate rises e) The good imported from a major trading partner becomes much less expensivearrow_forward
- Macropoland, a country that is a natural gas and oil importer, has a natural rate of unemployment (at the full employment level of GDP) that is about 4.5%, and the long run average rate of inflation over time has been about 2%. However, during the period 1973-1974, the country experienced an inflation rate of about 15% while simultaneously experiencing unemployment of nearly 13%.At the present time, Macropoland is experiencing very sluggish consumption and investment (a result of a fall in the housing market), and unemployment has again edged up to around 9%. Inflation is very low at 0.4%.Macropoland has just hired you as their economic advisor. You have a big job ahead of you. Using your knowledge of aggregate demand and aggregate supply, can you explain what happened in these two time periods?Develop a response that includes examples and evidence to support your ideas, and which clearly communicates the required message to your audience. Organize your response in a clear and logical…arrow_forwardExplain and show in detail whether the following sentence is correct or incorrect: "For Keynes, the rigidity of the real wage was the fundamental factor to explain the possibility of a capitalist economy operating with a high rate of unemployment".arrow_forwardSuppose the economy of a hypothetical country has reached its long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. The economy of a hypothetical country has been stable for two or three years with very low unemployment. Wages have been gradually increasing during this time. Now stock market prices begin significant increases, causing peoples’ investments, such as their retirement accounts and other investments, to increase in value. People feel very good about the future and use their new-found wealth to buy things that they had been hesitant to purchase in the past. Describe, in a short essay inserted below these questions, how the economic situation will change and how the government could best respond to these changes. Include detailed answers to the following questions in your essay: What kind of economic gap will start to occur (inflationary or recessionary)? What kind of fiscal policy might be helpful to stabilize the economy…arrow_forward
- Keynesian economics predicts that if government policy makers deem current equilibrium real Gross Domestic Product (GDP) to be "too low," then an appropriate policy action would be to do nothing, because the economy is self-adjusting. raise government spending, thereby increasing aggregate demand and pushing up real Gross Domestic Product (GDP) with little or no inflationary consequences. increase taxes, thereby causing aggregate demand to increase and inducing a rise in real Gross Domestic Product (GDP) with little or no inflationary consequences. reduce the money stock, thereby causing aggregate demand to decrease and inducing a rise in fall in the price level that generates an increase in total planned expenditures.arrow_forwardIn recent years, the US and few developed countries have interest rates falling to very low levels. Explain this situation according to Keynesian theory.arrow_forwardA principle difference between the new Classical and the new Keynesian models has to do with the choices made by business firms. We find that: a)new classical business firms choose the output level given the price level, while new Keynesian firms choose the price level given the level of output. b)new classical business firms choose the price level given the output level, while new Keynesian firms choose the output level given the level of output. c)both new classical and new Keynesian firms select the price level, but only new classical firms select the output level. d)both new classical and new Keynesian firms select the output level, but only Keynesian firms select the price level.arrow_forward
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